Cytonn Investments sees more consolidations in banking sector


Investment management firm Cytonn projects the banking sector to continue with consolidation as smaller and weaker banks struggle to remain afloat.

In its banking sector report titled “Consolidation and Resilience in a Challenging Operating Environment,” the firm says the low valuations on most of the banks has made them easy prey for their counterparts with stronger financial muscles.

“We expect increased M&A (mergers and acquisitions) activity given the current low valuations, with banks that are uncompetitive in the market being bought out and banks with common significant shareholders likely to merge,” said Cytonn.

Kenya’s banking environment is already going through consolidation as evidenced by heightened mergers and acquisitions over the last four years. Cytonn sees this momentum being sustained.

From November 2013 to date, there has been seven such transactions.

In 2013, Guarantee Trust Bank acquired a 70 per cent stake in Fina Bank in a deal estimated at Sh8.6 billion, the most expensive acquisition in the sector in four years.

In June last year, I&M Holdings wholly acquired Giro Commercial Bank for Sh5 billion. At that time, the book value of Giro Bank was Sh2.95 billion.

Other bank-to-bank transactions include SBM holdings getting a 100 per cent stake in Fidelity Commercial Bank (Sh2.75 billion) and M Bank acquiring a 51 per cent stake in Oriental Commercial Bank for Sh1.3 billion.

On average, the transactions have seen the banks being acquired give away 80.3 per cent of their stake.

Compilations by Cytonn further show local bank acquisitions have averaged price-to-book multiple of 1.8 times.

This means most banks have attracted a higher price than what is being carried in their books.

However, in the deal between Diamond Trust bank (DTB) and Habib Bank, DTB acquired it at Sh1.82 billion, being lower than the book value. Its books were carrying Sh2.38 billion, 23.5 per cent higher than what the owners fetched upon selling.

The latest development has left the market with 40 commercial banks as Chase Bank and Imperial Bank remain in receivership.

Lift moratorium

But even with talk about consolidation gaining momentum, the sector may not see a reduction in the number of banks for long.

The Central Bank of Kenya (CBK) has announced its intention to finalise the processing of licence applications for Dubai Islamic Bank and Mayfair Bank as it mulls lifting the moratorium on licensing of new commercial banks.

In addition, CBK has said nine more banks are eyeing a stake in Kenya’s banking sector. This will see the number of banks hit 51, that is if they all get approval.


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